Monday, 19 July 2010

Post-term restrictive covenants in franchise agreements

Restrictive covenants or non-compete obligations are essential devices to protect intellectual property (in the broadest sense), so a case concerning them is not exactly off-piste for an IP blog. They are the only way a business can stop employees using the information in their heads after they leave, and they can also be important in other types of agreement. In Pirtek (UK) Ltd v Joinplace Ltd (t/a Pirtek Darlington) & Ors [2010] EWHC 1641 (Ch) (07 July 2010) the High Court upheld one in a franchise agreement.
The key questions when deciding whether such a clause is enforceable are whether it is reasonable, and whether it is prohibited by competition rules (and if so whether it is exempted). In principle restrictive covenants are restraints of trade, and restraints of trade are only tolerable if they are reasonable. They will be permitted under common law if they are necessary for protecting the covenantee's interests (my words) - the judge in Pirtek stating that the common law is concerned with protecting goodwill rather than technical or business know-how. That statement might be rather broad - there are plenty of cases where it seems to be know-how of one sort or another that was being protected - but perhaps the simple fact is that there is not much mileage in trying to draw a distinction between the two. Anyway, it is common to find such restrictions analysed under this rubric - though statutory rules on competition will also be applicable, and here they were more important than the common law doctrine.
Here, the judge considered that the restrictions, which lasted for a year and covered County Durham, were reasonable as far as the common law was concerned. However, under the Competition Act 1998 it was a different matter. The restrictions were necessary to protect the franchisor's know-how, so they would not even be prohibited under Chapter I of the Act as restrictions on competition: this was the approach of the Court of Justice's judgment in the key franchising case, Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis [1986] EUECJ R-161/84 (28 January 1986). Which is not to say that such restrictions will always be OK, but at least we can be sure they will sometimes work - provided always they go no further than necessary.

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